International options

“SA’s economic performance is driving investors to eye international options”

Corruption continues to loom large over South Africa - it dwarfs the price of gold, the effect tax hikes has on the economy and stymies mass job creation. This situation will drive many investors to consider international options as a priority in 2019, affirms the head of Africa for deVere Acuma, part of one of the world’s largest independent financial advisory organisations.

According to Gavin Smith, international investment is a key way to help investors to “safeguard their money, mitigate risk, and capitalise on opportunities in light of the current economic situation in South Africa.”

Smith says that while the politicians attempt to clean up the mess of large-scale graft at State Owned Enterprises, ordinary South Africans are battling fuel, tax and interest rate increases. “This has not only affected investor confidence, but also had a damaging effect on any expected investment returns over the past year,” says Smith.

The VAT hike earlier this year, which saw the VAT rate increase from 14 to 15%, also had a severe impact on the pockets of all South Africans.

“The increase, necessary to combat a revenue shortfall, was not an easy political decision to make and came at the detriment of economic growth, despite renewed confidence in President Cyril Ramaphosa and a recovery in the price of commodities,” he points out.

Smith explains that what made the VAT increase harder to swallow was that it came along with other tax hikes, including higher estate and luxury goods duties as well as fuel levies and increases.

“Persistent fuel increases have played a significant role in adding to the predicament of cash strapped consumers. In fact, rising fuel costs have had an impact on almost every aspect of the supply chain, which together with tax increases have had a significantly negative effect on the economy,” he says.

He adds that the corruption allowed to fester at Eskom has recently also seen mass load shedding across South Africa as the power utility cannot provide a consistent source of energy. “This will undoubtedly have a negative effect on both the economy and on investors,” Smith explains.

Data collected by Focus Economics has indicated that the economy was still stagnant in the third quarter of the year, with low business confidence having a detrimental effect on investment. Export growth has been at its weakest point in the third quarter, with Finance Minister Tito Mboweni’s bleak fiscal outlook in the medium term budget policy statement indicating negative prospects for economic growth into the new year, further complicated by all three credit ratings agencies expressing concern over the pace of fiscal consolidation.

Smith points out that Mboweni’s medium term policy reflected a downward trend of economic growth and rising unemployment figures, which could point to further credit ratings downgrades during the course of 2019.

The downgrade that took place earlier this year, says Smith, created “uncertainty in the market, which inevitably leads to volatility.” Of the many adverse economic effects a downgrade can cause, he maintains that it is also linked to an increase in the cost of credit, “which in turn relates to currency devaluation, rising interest rates and inflation.”

On a more positive note, there is a growing sentiment that South Africa will fight its way out of recession by the end of 2018. But economic recovery in the New Year will “depend heavily on private investment and public private partnerships,” says Smith.

He points out, however, that not all predictions for 2019 are as positive.

“Policy failure, lack of economic growth and political distractions that plagued 2018 could well be the foundation for another dismal year, with expectations of a plummeting rand/dollar exchange.”

The push for land reform and particularly land expropriation without compensation could have dire economic consequences. While investors may agree that land reform is necessary to address inequality in the country, there are concerns that expropriation without compensation could undermine property rights, collapse local banks and further discourage foreign investment. There is little doubt that this issue is a key factor impacting market uncertainty.

Smith emphasises that going forward, addressing and combatting corruption is pivotal to any economic upliftment that can take place going forward.

“Corruption dwarfs the price of gold and has far reaching effects on economy. Moreover, the world is watching to see how much of a rear-guard action Zuma and his allies will be able to perform. As such, the country waits with bated breath for the 2019 general elections for more clarity in terms of what the New Year will bring,” he adds.

Smith says it is important that investors ensure that they take the appropriate measures to guard their wealth over the short-, medium- and long-term.

“Instead of simply trying to chase the markets, investors need to place their value in adequately diversifying their portfolios to preserve and build their wealth,” he affirms. “A key way to do this, as history shows us, is to explore the many bona fide, established international opportunities that are available.”